While the Fed controls short-term rates, it’s the markets that set 10- or 30-year Treasury yields (the higher the yield, the cheaper the bond). How high they are depends on two things:
Future short-term rates
Term premium
What Is Term Premium?
It’s the estimated extra return that you (investors) expect for keeping your money locked up, regardless of inflation, policy, or rates (these can change a lot).
Why Term Premium Rises
Here are the reasons why this may happen:
Current debt levels, weird policy, and central-bank credibility don’t look good.
Future inflation looks scary.
The government borrows more, so there’s pressure to buy bonds.
With all those that, buyers demand higher returns.
What Is a Bear Steepener?
If you came across this term, you first need to understand what yield curve is - it basically shows what interest rates are from short to long maturities.
When long-term yields rise faster than short-term ones (e.g. 10-year moves from 4% to 5% while a 2-year stays close to 4%), that’s called a Bear Steepner. The “steepener” means a widening gap while the “bear” means a drop in prices.
Extra tip: if you come across “bps”, these are so-called basis points. 100 basis point = 1 percentage point
Receipt #25: WBD +148%. FTNT +114%
As is our tradition, we want to stay accountable for what we said. We’ve just analyzed the calls we made in the post last August. Here’s how it went:
High Treasury Yields Speak Volumes
If long rates are high, that means business loans and mortgages are expensive. It’s not good for long-duration bonds.
Also, pricey growth stocks can feel the pressure (future profits are worth less today).
This usually doesn’t happen to short treasury bills because they’re less sensitive.
How to Protect Your Capital
Based on all this, you should watch:
Both 10-year + 30-year yields
2-year vs. 10-year spread
Inflation expectations
Federal deficits / Treasury issuance
Fed credibility
This will help you answer find out if yields are rising because growth is strong or because investors are scared and need reassurance.